Archive for March, 2009

The markets, overall, experienced a very solid rebound this month. Technically, the market got oversold bottoming out on March 6th when the S&P 500 hit the devilish level of 666!! Perhaps some divine intervention prevailed and shed a wee bit of grace on the market in the spirit of Saint Patrick. Perhaps not, as well. In any event, we rebounded close to 20% over the last three weeks. The bounce has allowed us to catch our breath but I caution everybody to remain on guard.

There seems to be a growing stream of information and activity surrounding the travesty with Auction Rate Preferred Securities, otherwise known as ARPS. Citigroup and Wachovia just settled a $4.7 billion claim brought by California investors. Oppenheimer Holdings, based in Toronto, is considering incorporating itself in the United States in an attempt to receive government funds via the TARP (Troubled Asset Recovery Program) to settle outstanding claims by ARPS investors.

This morning, Bloomberg reports UBS Auction-Rate Securities Suit Dismissed by Judge. What is this? No fraud was perpetrated? Did the investors not properly make their claim? Was UBS not liable in the underwriting and selling of ARPS? Is Sense on Cents making no sense with all the writing on this topic? Let’s review what the judge in this case has to say: (more…)

While recent housing data has shown a pickup in home sales and housing starts, albeit from very low levels, data released this morning showed no stability in home prices. The WSJ reports:

Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine… falling more than 20% in the last year,” said David M. Blitzer, chairman of S&P’s index committee. Both composite indexes and 13 of the 20 metropolitan areas reported record year-over-year declines.

As of January, the 10-city index is down 30% from its mid-2006 peak and the 20-city is down 29%. The two indexes have fallen every month since August 2006, 30 straight.

The indexes showed prices in 10 major metropolitan areas fell 19.4% in January from a year earlier and 2.5% from December. The drop marks the 10-city index’s 16th-straight monthly report of a record decline.

In 20 major metropolitan areas, home prices dropped 19% from the prior year, also a record, and 2.8% from December. (more…)

Could American banking regulators and the Federal Reserve itself work under the purview of the International Monetary Fund? With the G-20 getting ready to meet later this week in London, increased global financial regulation is a major topic on the agenda. French Prime Minister Sarkozy is leading the charge. The WSJ reports An Empowered IMF Faces Pivotal Test:

The IMF is about to gain more power. Thursday’s summit of leaders of the Group of 20 industrialized and developing nations is poised to elevate the IMF by promising to pump more than $250 billion into the fund, and asking it to issue “early warnings” about countries in peril.

“Everyone sees the need for a rejuvenated IMF,” says Egyptian Finance Minister Youssef Boutros-Ghali, who heads a policy-making group that oversees the IMF.

The IMF’s track record around the globe is decidedly mixed. In certain countries, such as Ukraine and Belarus, economic conditions worsened despite IMF aid. (more…)

States, student-loan agencies and closed-end mutual funds were the primary issuers of the securities, long-term bonds with interest rates set at weekly or monthly auctions.

1. Issuers have long term projects funded by long term loans or preferred shares. Those loans or shares are the underlying collateral in an auction rate preferred transaction. While people investing in a pure Ponzi scheme believed they were investing in a legitimate money manager’s business, investors in ARPS believed they were investing in a money market fund. The key here is MISREPRESENTATION.

The debt, marketed by bankers as cash equivalents, offered investors yields of a quarter-percentage point or more above conventional money-market funds, indexes show.

2. In both a Ponzi scheme and ARPS, the allure of regular liquidity with solid returns draws new money into the game. With a Ponzi scheme, the returns are better than a benchmark index. With ARPS, the returns were better than other cash alternatives or money market funds. (more…)

Lincoln Financial Group is not exactly a small or even medium sized insurance company. LNC has a current market capitalization of approximately $2.5 billion. The stock is down almost 40% on the day, trading at approximately $6.50. The 52 week high for Lincoln was $59.99. Clearly, Lincoln has a whole host of issues.

What is Lincoln thinkin’? What should a company do in circumstances like this? Well, how do they put themselves in a position of getting access to government bailout money currently allocated to banks?

Perhaps Lincoln could become a bank. But how does an insurance company become a bank? Well, how about they just go buy one. So that is what Lincoln did. The WSJ reports:

Lincoln National was believed to have qualified for TLGP (Temporary Liquidity Guarantee Program) and other government programs after it acquired Newton County Loan & Savings in Indiana and converted into a savings and loan in November. However, in the company’s filing with the Securities and Exchange Commission, it said it does not believe it qualifies under the current provisions of the TGLP and thus voluntarily withdrew its application to participate.

There is little doubt the American populace is getting increasingly frustrated with the pace and level of government bailouts. Are we about to literally “go over the line?”

Is the United States about to allow a Canadian company to incorporate itself here in the U.S. for the purpose of receiving a bailout? Is this the height of hypocrisy or what?

I refer to the fact that Oppenheimer Holdings, a Toronto based investment company involved in the travesty surrounding the sale of ARS (Auction Rate Securities) is looking to incorporate in Delaware in order to receive federal bailout funds. From Bloomberg’s If Oppenheimer Gets Handout, Blame Canada:

Oppenheimer “is exploring becoming a U.S. corporation and a U.S. bank holding company in order to help resolve the ARS problem for our clients,” the company said in its annual letter to shareholders released last week. (Toronto’s Oppenheimer & Co. isn’t related to OppenheimerFunds Inc., a unit of Massachusetts Mutual Life Insurance Co.)

The “ARS problem,” of course, is the nasty pickle Oppenheimer has gotten itself into with customers who hold $929.6 million in auction-rate securities, the ill-fated investments that flat-lined in February 2008. The auction-rate meltdown left investors at Oppenheimer and many of its Wall Street brethren unable to liquidate positions that had been marketed as, well, pretty darned liquid, to customers who often had no clue about the product’s risks.

Why should U.S. taxpayers bail out an investment company that improperly marketed securities? Why shouldn’t Oppenheimer, and every other investment manager or bank that improperly – if not fraudulently – marketed ARPS, be forced to make their own investors whole? (more…)

Virtually every sector in the economy is faced with the same predicament: excessive debt. Whether residential housing, commercial real estate, consumer finance, automotive, municipal finance, or Uncle Sam, the current debt service along with future debt service is overwhelming.

In my opinion, the amount of influence with your lender (creditor) is directly related to the amount of debt and the terms of that debt. Regrettably for many taxpayers, the amount of debt from residential mortgage payments along with credit card bills and other household debts are not sufficient to create much influence. For larger corporations or municipalities, the influence is greater as these entities threaten to default. Thus, we see ongoing games of “chicken” being played between debtors and creditors while debt service typically gets restructured.

What about the largest debtor of all, that being Uncle Sam? He can’t play the “default” card and expect the market to treat him with any degree of credibility. Thus, Uncle Sam does not have the option of restructuring or default. The only real option left to Uncle Sam is devaluation. How does that get played out? In the very manner that the Fed and Treasury are doing right now. Pump money into the system like there is no tomorrow. (more…)

Poor Oliver Twist faced the wrath of the workhouse master when he asked for more soup. Why is it that certain banks do not face similar wrath when they go back to Uncle Sam for more “bread” with the soup?

Over and above this fact, it is now widely speculated that significant revenues at certain banks (Citi and BofA) were generated in the last few months via unwinding exposure to AIG. In short, AIG entered into massive transactions with these banks to eliminate further exposure on pre-existing trades. In the process, AIG (taxpayers) incurred larger losses while these banks generated large profits. Why would AIG do this? It’s part of a “going out of business sale” and executed with a “volume discount.”

As an investor, though, am I supposed to think that bank revenues are improving because of positive trends in the economy? No way.

Risks remain extraordinarily high. To that end, I STRONGLY encourage people to listen to the audio recording or the podcast of my interview with Michael Panzner from last evening. Michael has had the economy and the market called for the last few years. His books are comprehensive in laying out a sobering reality and potentially a daunting future.

In case you missed LD’s Sunday night radio show, just click on the Play button below for the audio recording. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.